Peter Gulia

C.B. Zeller’s point is in 26 C.F.R. § 1.415(f)-1(a)(2)&(3). And see 26 C.F.R. § 1.415(f)-1(f) for some wrinkles about § 403(b) contracts. For example, a § 415(c) limit counts annual additions to a § 403(b) contract and annual additions under a § 401(a) plan of an unaffiliated business the individual controls (more than 50%). An example is a physician who is an employee of a charitable hospital and is the shareholder of her separate professional corporation for another medical practice. Or a professor who is a university’s employee and is the member or proprietor of her consulting business. https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.415(f)-1

The exemption’s condition II(e) requires that “the amount received by the plan as consideration for the sale is at least equal to the amount necessary to put the plan in the same cash position as it would have been had [the plan] retained the contract [and] surrendered it[.]” https://www.govinfo.gov/content/pkg/FR-2002-09-03/pdf/02-22376.pdf A delivery of property other than money is not an amount. Even if a transaction might get an exemption from prohibited-transaction consequences, that does not relieve a fiduciary from any other responsibility. The plan’s acquisition of IBM shares might be a fiduciary’s breach.

At least for an individual-account retirement plan and for a non-owner participant, a participant subject to an involuntary minimum distribution (after the later of when the participant attains age 72 or retires) presumably ended employment and likely attained the plan’s normal retirement age. Such a participant likely is entitled to a distribution. Following C.B. Zeller’s note, isn’t the real question whether the plan’s provisions allow such a participant to take an amount less than her whole balance, or instead require that a voluntary distribution be a single sum of the entire account? And aren’t the answers to many questions found in the realm of RTFD—Read The Fabulous Document?

Another wrinkle: Sometimes people describe a source of potential coverage as health insurance when it is not. I have a credit-card-sized piece of plastic that bears a Blue Cross logo. Almost anyone who isn’t an employee-benefits practitioner calls it an insurance card. But if I read the reverse side’s fine print, that text warns: “Your health benefits are funded entirely by your employer. QCC Insurance Company provides administrative and claims payment services only.” Whatever State law or rule governs an insurer’s health insurance contract might not govern an ERISA-governed employee-benefit plan, at least not if the plan uses no health insurance contract (and no precedential court decision interprets ERISA to apply an insurance-law or model coordination-of-benefits rule in meaningfully similar circumstances). Courts’ decisions vary on questions about how to construe or interpret a governing document’s text, and about whether to infer, import, or invent a coordination-of-benefits provision.

About a § 403(b)(7) custodial account: The agency’s rule distinguishes between amounts attributable to elective deferrals and those that are not. Compare 26 C.F.R.§ 1.403(b)-6(c) with -6(d). https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.403(b)-6 Further, -(d)(2) provides: “[A] hardship distribution is limited to the aggregate dollar amount of the participant's section 403(b) elective deferrals under the contract (and may not include any income thereon), reduced by the aggregate dollar amount of the distributions previously made to the participant from the contract.” Different rules could apply regarding a § 403(b) annuity contract or a § 403(b)(9) retirement income account.

And get your ERISA lawyer's advice about whether a fiduciary role, however limited, requires ERISA fidelity-bond insurance.

A method is using a separate (and unassociated) accounting firm to retrieve (including getting from the IRS the employer’s income tax returns and payroll tax returns), fill-in, and reconstruct the unreported years’ records. (A plan’s administrator wants its independent qualified public accountant to maintain independence.)

Even with a perfect allocation of responsibilities between or among the administrators, remember that ERISA § 405(a) imposes some co-fiduciary responsibilities regarding any other fiduciary’s breach. If a fiduciary “has knowledge” of another fiduciary’s breach, the observing fiduciary must “make[] reasonable efforts under the circumstances to remedy the breach.” ERISA § 405(a)(3). In doing so, the observing fiduciary must use no less care, skill, prudence, and diligence than an experienced fiduciary would use.

And one hopes BenefitsLink readers recognize that I merely furnished pointers to some (but not all) relevant sources, and did not state any conclusion.

This four-page article https://backend.fisherbroyles.com/wp-content/uploads/2020/05/Canna401k.pdf mentions [on page 2] treating some expenses for retirement contributions as a cost-of-goods-sold adjustment, and some as indirect costs that must be capitalized for an inventory. Unstated is what I heard from young lawyers who work in accounting or dual-practice firms: The accountants help a client develop bookkeeping and accounting methods that, within generally accepted accounting principles, push more expenses into those tax-recognized categories. Page 4 describes some (but not all) difficulties about finding investment and service providers.

Some IRS-preapproved documents include a subsection about what is required for a distribution following a TEFRA § 242(b) election. If so, the plan’s administrator or other fiduciary would follow those provisions, even if they constrain the distribution more than is otherwise necessary for the plan to tax-qualify. And you’d want to apply TEFRA’s transition rule: The method of distribution elected under TEFRA § 242(b) “would not have disqualified [the] trust under paragraph (9) of section 401(a) of [the Internal Revenue] Code as in effect before the amendment made by [TEFRA § 242](a).” Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97–248, § 242 (Sept. 3, 1982), 96 Statutes at Large 324, 521 (1982) [cited page attached]. TEFRA section 242.pdf

If the plan compels an involuntary distribution and you have the estate’s taxpayer identification number, pay the required distribution (as ESOP Guy suggests). If the plan compels an involuntary distribution and you lack information needed for tax-information reporting, consider suggesting that the personal representative seek his or her lawyer’s advice about the representative’s personal liability for the estate’s loss that results from a failure to collect an amount due the estate and for an excise tax that could have been avoided.

Whether a claimant must or need not submit source documents to substantiate her hardship expense is governed by the particular claims procedures and other documents governing the particular plan.

Some (but not all) relevant sources include: 26 C.F.R. § 1.72-16 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR807fc2326e73cb3/section-1.72-16 including its (b)(1)(ii): “The proceeds of a contract described in subdivision (ii) of this subparagraph will be considered payable indirectly to a participant or beneficiary of such participant where they are payable to the trustee but under the terms of the plan the trustee is required to pay over all of such proceeds to the beneficiary.” and its (c)(2)(ii): “The portion of the proceeds paid upon the death of the insured employee which is equal to the cash value immediately before death is not excludable from gross income under section 101(a). The remaining portion, if any, of the proceeds paid to the beneficiary by reason of the death of the insured employee—that is, the amount in excess of the cash value—constitutes current insurance protection and is excludable under section 101(a).” IRC § 402(c) http://uscode.house.gov/view.xhtml?req=(title:26%20section:402%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section402)&f=treesort&edition=prelim&num=0&jumpTo=true 26 C.F.R. § 1.402(c)-2 https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/section-1.402(c)-2 including its Q&A-3(b)(3): “An eligible rollover distribution does not include . . .: [t]he portion of any distribution that is not includible in gross income[.]”

After February 2017, some plans use for hardship-distribution claims a procedure in which a claimant does not submit source documents that show the safe-harbor hardship expense, but is informed of a distributee’s obligation “to preserve source documents and to make them available at any time, upon request, to the employer or administrator.” If a plan uses that procedure, the IRS instructs its examiner not to ask for source documents unless: some employees received three hardship distributions in a plan year; there is no adequate explanation for the multiple distributions; and the examiner’s manager approves the request for source documents. A plan might limit the number of hardship distributions in a year in ways designed to make it unlikely the plan’s administrator ever would get a request to obtain participants’ source documents. For example, a plan might limit a participant to two hardship distributions in a year.

Thank you for the quick and clear help. Lacking a § 414(w) “undo” distribution for those who had been inattentive makes an automatic-contribution arrangement a non-starter.

A plan’s sponsor wants to provide an automatic-contribution arrangement for some specified classes of non-highly-compensated employees, but not others. (All highly-compensated employees would be excluded.) May a plan provide this without tripping on a tax-qualification condition? Is it feasible to provide this using an IRS-preapproved document without losing reliance on its IRS letter?

For a service provider’s publication, especially on its website, one presents differently a response to a question of law that lacks an obvious spoon-fed answer. A service provider must pretend it does not furnish tax or legal advice. Yet, at the same time the service provider knows it is exposed to liability for (at least) a customer’s reliance on the service provider’s communication. And no matter how clear, conspicuous, and intense the not-advice warnings are, a service provider’s customers (and other readers) rely on the communications. Those concerns often lead a service provider to present an explanation closely supported by a public law source rather than something that calls for too much reasoning. And for many employee-benefits points, the liability might be a smaller exposure and a lower probability if the answer is one readily tolerated by the government agencies. An employer that gets no advice and follows such a communication might miss an opportunity, but is less likely to do something that causes a harm for which the tort of negligent communication (or, often more practically, a need to keep a customer) would provide a remedy. Recognizing the context, Brian Gilmore’s blog page for Newport is strong for what’s feasible in a communication of that kind.

MoJo, I’m glad your clients fall-in with your guidance. My limited experience is different. (I lack direct experience with employers that would face the question Belgarath described. I see them only indirectly through my work as counsel to other law firms.) No matter how carefully and thoroughly a lawyer explains the potential consequences and the “cheap insurance” sense, those firms’ clients won’t bite on paying anything for a VFC submission. That’s even when they say the work would be done by a nonlawyer assistant, with supervision and review not billed. And the question gets to a law firm only after a recordkeeper or TPA declined to work on a VFC submission. Do others have different experiences?

These situations often involve an awkward dance or standoff about whether the inquirer engages the lawyer. An inquirer is reluctant to engage the lawyer unless the inquirer believes the lawyer will render the conclusion the inquirer desires. But a lawyer is reluctant to accept a client unless the lawyer is confident the client will pay, even if the advice is not what the client wanted to hear. (Some of us would require an advance-retainer payment in an amount the lawyer estimates as more than enough to pay the likely full fee. And that security to aid collection is not, by itself, enough to overcome other burdens and risks about accepting a new client.) I no longer waste a half-hour consultation unless the inquirer is introduced by a lawyer or other professional who gives me comfort that the prospective client is a good fit (or who gets my professional courtesy). On the later side of these situations, I get plenty of clients who want me to guide the undo of a nonexempt prohibited transaction. I never have any trouble with those clients. And they usually remain continuing clients who bring a stream of good work.

But let’s ask Belgarath’s key question: If an employer does not take up EBSA’s suggestion (and the correction involves small amounts), how often does Labor pursue actual enforcement? Is the letter’s implied threat somewhat likely or highly improbable? What is the actual experience BenefitsLink people have seen? Is the cost-benefit analysis as simple as estimating the probability-discounted cost of what would result if EBSA both detects a fiduciary’s breach and vigorously pursues enforcement, and comparing it against the expenses (including professionals’ fees) of using the VFC program? Or do you advise a different analysis?

Beyond the practical concerns AKowalski mentions for considering whether and what to communicate to a potential beneficiary, here’s another. If the plan provides participant-directed investment, a fiduciary might welcome a claim in which someone seeks recognition as a beneficiary. A plan might provide that a power (and obligation) to direct investment passes to a beneficiary, for his or her separate-share subaccount, when the administrator decides the claimant is a beneficiary, even if the beneficiary does not request a distribution. A plan’s fiduciary can get ERISA § 404(c) protection for a beneficiary’s actual or treated-as investment direction. Otherwise, a plan’s fiduciary (if it knows the participant died) might have responsibility to consider the prudent investment of the participant’s account.

Whether a disclaimer must be acknowledged before a notary or other officer, must be recorded in a county’s or parish’s recorder-of-deeds office, must be filed in a court, or must meet other notice, authenticity, or procedure requirements are among the points for which Luke Bailey suggests the disclaimant get the advice, and perhaps other services, of the disclaimant’s lawyer. Whether a plan’s administrator prefers to impose some authenticity protection beyond what is required under a relevant State’s law (and the plan’s governing document) is a fiduciary decision.

If the participant’s distribution had not commenced and the plan’s provisions do no more than is needed to follow Internal Revenue Code § 401(a)(9), consider whether the plan might not command an involuntary distribution until the end of the tenth calendar year that follows the year of the participant’s death.

While I lack knowledge about the top-heavy rules, I suspect questions about who is a participant or is “covered by the plan” might be resolved using concepts similar to those discussed last week https://benefitslink.com/boards/index.php?/topic/68399-spd-provided-to-employees-eligible-to-participate-in-plan/. If so, an individual might become a participant when the individual has met the plan’s age, service, and other eligibility conditions. Further, the rule (at M-10) states: “A non-key employee may not fail to receive a defined contribution minimum because . . . the employee is excluded from participation (or accrues no benefit) merely because of a failure to make . . . elective contributions.” https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.416-1